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Inequality and Informal Economy: The Moderating Role of Financial Technology

Author

Listed:
  • Magwedere Margaret Rutendo

    (University of South Africa, Faculty of Economics and Financial Sciences, Department of Finance, Risk Management and Banking, South Africa)

  • Marozva Godfrey

    (University of South Africa, Faculty of Economics and Financial Sciences, Department of Finance, Risk Management and Banking, South Africa)

Abstract

Increasing income distribution gaps have become a global socio-economic problem accentuating economic and social exclusion with a potential of generating declining social cohesion and political stability. This study examines the relationship between the informal economy and income inequality, alongside the moderating effect of financial technology (fintech). The persistent prevalence of informal economies in emerging markets and developing economies (EMDE) is often associated with elevated income inequalities. Utilizing data from 2012 to 2022 across 18 African countries, this study employs the two-step system Generalized Method of Moments (GMM) to address potential endogeneity biases and to robustly estimate the relationship between the size of the informal economy and income distribution. The results indicate that a larger informal economy correlates with reduced income inequalities, acting as a buffer for marginalized communities by providing economic opportunities. Conversely, fintech initially indicates an increase in income disparities due to skill and access discrepancies. However, when functioning as a moderating factor between informal economies and income inequality, fintech demonstrates a potential to reduce the inequality gap. This study suggests that policy interventions geared towards economic formalisation need to account for the dual role of financial technologies. Further research is required to explore other socio-economic factors, including political dynamics and labour market policies, which influence income inequalities. Prominent policy decision confronting African governments is the role of the informal economy. The findings of the study advocate for a nuanced approach to addressing structural reforms within informal sectors and carefully utilise fintech as a tool for promoting equitable income distribution

Suggested Citation

  • Magwedere Margaret Rutendo & Marozva Godfrey, 2025. "Inequality and Informal Economy: The Moderating Role of Financial Technology," Economics, Sciendo, vol. 13(1), pages 197-211.
  • Handle: RePEc:vrs:econom:v:13:y:2025:i:1:p:197-211:n:1004
    DOI: 10.2478/eoik-2025-0004
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    More about this item

    Keywords

    inequality; income distribution; informal economy; financial technology; shadow economy; institutional quality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • N30 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - General, International, or Comparative
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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